Well, I have my prediction too for the supply chain of 2013 (and 14 and 15 too). If anything I’d call it the rise of the Supply Chain Currency Wars. The first shot of this new phase of global currency wars was launched by Japan a week or two ago. While it will start slowly, over the next few years, this sort of tit-for-tat devaluation will play havoc with global supply chains especially the one’s with finely tuned cost calculations justifying the location of factories and/or distribution centers.

Devaluation of currencies over a matter of couple of quarters and in-kind retaliation is going to drive up financing risk in the supply chain. Were such a scenario to come to pass, then supply chain operators need to nail down some other variables so as not to have all the variables in a supply chain in a volatile flux.

Big Data – Nyet. Bigger and Badder visualization – Not a chance.

Increased volatility, upset cost calculations – Yes, sir – that’s for breakfast, lunch and dinner around the corner. Almost all the Emerging Market countries (such as BRIC) have entered a period of flux, not unlike what the Nutty Market countries at the periphery (Egypt, Syria etc) entered into roughly 2 years ago. This flux in the Emerging Markets – both China and India have received a lot of foreign investment in the past years.

So take one scenario : As projected growth and real growth decline, these countries will be subject to capital outflows. This is why, devaluation of the currency is the only way out for countries that constitute the manufacturing base of the world – the hope would be that devaluing their currency makes their exports cheaper and thus keeping the growth engine going. However, this is a problem for all other developed countries other than the US.

Capital outflows from emerging markets need to go somewhere. Where? You have only two choices – Bonds or Equities (well, there’s a third – Dollars). As the Fed ramped up talk about tapering the Quantitative Easing, yields have spiked for US Treasuries. Remember that if the yields spike too much, governments at all levels in the US (local, state and federal) will essentially stop functioning as they have promised to i.e. the inability to finance and roll over maturing debts at spiking rates. Equities have doddering at ever higher and higher valuations – buying into the markets at these levels is asking for trouble.

If it is bonds that these capital outflows crowd into – yields come down and everything is kicked down the road for a few more years. If it equities that these capital outflows crowd into – the markets are buoyed for a little longer with the attendant desire for the wealth effect that the Fed has been hell bent on creating.

Then the cycle reverses again intolerable equity valuations or dampened yields force capital outflows from the US back outwards in search of return.’

So what do Currency Wars mean for the supply chain? Take your pick: Disruptions, Volatility, Uncertainty, Wild swings in valuations and costing, Sourcing variations that inevitably lead to quality variations.

I couldn’t resist the pun. Long time readers of the blog would know very well that the insights of Taiichi Ohno hold a special place in my corpus of intelligent and wise things to have around. So it is a rather “Deming – like” sort of conundrum to have at hand an Oh No!! moment from Japan itself : Bernanke just felt a chill down his spine.

If you are not plugged in into the vast array of paralyzing news that flows around you or perchance missed this rather telling problem that has arisen in Japan of late.

In April 2013, Japan announced a QE program of $1.4 trillion, an amount equal to roughly 25% of the Japanese GDP. To put this into perspective, the US’s QE1, QE 2, QE 3, and QE 4 programs which were spaced out over four years are an amount equal to roughly 16% of US GDP.

When people refer to QE (Quantitative Easing) by the central bank, they almost always refer to it as if it were the only driving factor in the land. You have to remember that both Japan and the US has been running budgetary deficits as well. For Japan, it looks like this : Japan Government Budget (as % of GDP).

Japan announced a larger program relative to its economy all at once. The idea was that by throwing around a big enough amount of money, Japan’s economy would finally waken from its 20-year slumber and take off.

This effort has been an abysmal failure. Japan’s second quarter GDP grew at just 0.6% quarter over quarter, registering the single biggest growth MISS in a year (economists were expecting 0.9% which, by the way had already been revised lower).

Put in plain terms, Japan announced the single largest QE effort in history, and not only did its economic growth projections have to be lowered, but it is failing to even meet these lowered growth projections.

So, the noted result is that the GDP came in lower than the lowered forecast. For now. Oh no!!!

So what is supposed to happen?

The central bank – BOJ, Bank of Japan, being one of the bigger behemoths (financially speaking) in a country, can wish into existence more money which they then use to buy bonds. Why bonds and particularly govt. issued bonds? The point is that that’s where a lot of people have parked their monies because of the current state of the economy – accepting a nominal return in exchange for safety. By buying bonds with seemingly inexhaustible (though the only currency that is truly inexhaustible is stupidity but even a simple familiarity with the human being shows that they do get tired from time to time) i.e. magically created monies, the BOJ hopes to drive down the yield on the said bonds such that if people holding bonds currently felt that they were getting a whole lot of safety, they were going to get even less return for that safety. Ergo, those monies would be then retrieved and ploughed back into comparatively riskier assets such as stocks (i.e. the preferred funding mechanism for new ventures) which then leads to hiring instead of firing and so on.

Except that the GDP measure that is supposed to show the increase in “virtuous” activity that all this QE was supposed to engender has not worked out as well as one would have expected.

And so what is one to make of this?

Perhaps this Oh-No!! moment can lead us to what I appreciate as the central Ohno (the Taiichi kind) precept i.e. Respect for People. You see, when the BOJ (and as an agent for action, one cannot deal with a more ill-suited agent. In a firm, the BOJ would be the payroll + performance manager combined) wades onto the scene, the fundamental action is to whip people around, to coerce them into an action. You see the problem?

Let’s get something straight here – while stupidity is a truly inexhaustible resource in this world, between the ears of each and every human being is an explosive and creative engine. Unleashing this engine can only be contemplated as an extension of the inherent respect that every man, woman and child are inherently owed as their endowment.

All the machinations of central planners and allied commentators take the track of either, “Messing with/exciting the animal spirits”, or “Devaluing the efforts of people in the past i.e. through inflation” or the like.

As these Oh-No’s pile up, perhaps, it would be a wise thing to see how Ohno studied the matter in a factory on a small island far away…

If you remember Lt. Gen. Russel Honoré (Ret.) from the Katrina disaster, you might also remember his admonition to the press swarm of that time – “You’re stuck on stupid”. You can of course watch that video here.

Well, no point letting that well worn phrase go to waste, here he is again talking about a rather related issue in Leaders stuck on stupid.

Are you a-buck-stops-here leader? Do you secretly look forward to making the call when a crisis has stakeholders demanding action? If so, then please be advised that some of the world’s toughest leaders are not at all impressed. In fact, as far as Lt. Gen. Russel Honoré (Ret.) is concerned, you don’t have the right stuff to lead any organization in today’s complex world.

and

He thinks, for example, that most organizations need to tear up their crisis plans. Simply put, if you are not prepared for a total loss of power and communications, not to mention a scenario that involves body bags and the need to break a few laws, then you are not thinking bad enough. To really prepare for a crisis, Honoré, who recalls having to order airline authorities to forget about screening procedures while evacuating New Orleans, insists you must seriously imagine your worst nightmare. And then you must prepare for your plan to fail, “because the first casualty in any emergency is the disaster plan.”

Having been part of a few Disaster Recovery Plans which were nothing short of disasters in and of themselves, I can say this that we do pay excessive lip service to “disasteration” or disaster preparation. However, what I took away from all of this was – do we need a disaster plan to be able and willing to do the following.

According to Gerard Seijts, executive director of Ivey’s Ian O. Ihnatowycz Institute for Leadership, the general’s message is simple. “The U.S. Army revolutionized how it makes decisions because technology-enabled collaboration is superior to centralized decision making in today’s complex world of interconnected risks, opportunities and challenges. And other organizations, including corporations, should do the same because collaboration across boundaries leads to bottom-up information flow, which may have saved a few U.S. banks during the financial crisis.”

It was announced recently that Disney Parks and Resorts will be teaming up with Jaxport, the TracPac shipping terminal in Jacksonville, Florida. About 75% of Disney’s merchandise will now be going through this port as opposed to the one they were previously using in Savannah, Georgia.

When asked about the move, Senior VP and CFO of Disney Parks and Resorts, Anthony Connelly, had this to say:

“From a business decision for us, it’s about optimizing our supply chain and being able to minimize the cost associated with bringing freight here. So to us, it was about saving money and we’re certainly excited to participate in growing Florida’s economy as well as Jacksonville’s economy.”

Although a quarter of Disney’s merchandise will still pass through the port in Savannah, the goal of the company is to eventually have Jaxport be the standalone terminal for all of Disney’s merchandise.

Jaxport – America’s New Logistics Center

Disney’s switch to Jaxport is a signal that this hub is becoming a major player in the import and export industry. What makes Jaxport so unique is its ability to serve as a terminal for both inbound and outbound cargo as well as the ease of distribution of goods to numerous parts of the United States.

Jaxport can also boast a new state-of-the-art container terminal, and the hub’s location in Jacksonville, Florida means it is the crossroads of global commerce, with multiple highway and rail options in and out of the city.

Disney is not the only company taking advantage of Jaxport’s superior capabilities. Brands like Coach, Michael’s, Bridgestone, PSS World Medical, Sears, Samsonite, Maxwell House and Unilever have all made the switch to Jaxport in an effort to better optimize their supply chains.

Rich Markovich, Director of International Logistics and Compliance for the Michael’s art supply chain, notes an advantage Jaxport has and why it is such an attractive choice:

“A real point of strength is the workforce in the Jacksonville area – on top of the dynamics that make Jacksonville a very attractive place when it comes to domestic transportation.”

The Decline in U.S. Manufacturing Leads to New Supply Chain Logistics Centers

Throughout the last decade, there has been a measurable decline in the manufacturing of goods on US soil as production has shifted to overseas markets where costs are much lower.

This shift has caused an increase in imported goods to this country and a need for new supply chain logistical centers that can handle the arrival and distribution of thousands of cargo containers.

Many ports throughout the country are trying to capitalize on this import trend, but it is the ports on the southeast coast in particular, such as Jaxport, that are in a position to reap the greatest benefits. This is in large part due to the fact that west coast ports are currently close to operating capacity and cargo moved from these hubs must absorb increasing expenses as fuel prices remain high.

From a First Coast Vision Report:

“Supply chain logistics centers are catalysts for further economic activity in the community. Clustering of these facilities is common because businesses feel more confident in their location decisions when they see companies with similar business needs thriving. As Jacksonville attracts more of these companies, others will seriously consider Jacksonville for their own relocations and expansions.”

As supply chain management executives continue to seek optimized and cost-effective logistical solutions, they must consider using ports of entry with established supply chain centers that have connections to major trade lanes, reliable containership services, and a qualified workforce. These considerations make Jaxport a natural supply chain logistics center choice despite intense competition.

Like others, Gartner is projecting a movement of manufactured goods overseas back nearer to US soil, if not within the country itself. It projects that "By 2014, 20% of Asia-sourced finished goods and assemblies consumed in the US will shift to the Americas," which of course can mean Mexico, Honduras, Costa Rico and other nearby sourcing locations.

The drivers? First,they says that many companies initially underestimated the true total costs of long supply chains offshored to Asia, miscalculating inventory costs, greater issues with product quality, lost sales or discounted prices due to long lead times, IP theft, and more.

They also note that some of those issues may soon be exacerbated in some countries (meaning China) as more and more production will be consumed in Asian markets, not Western ones.

"Customer demand for service excellence and increased product choice at competitive prices is driving brand owners to reassess the value delivered by their supply networks," the analysts say. "Sacrificing lead time for reduced unit cost will be insufficient to satisfy this customer requirement."

For certain segments of the supply chain, a "nearshore" strategy will make a lot more sense, they believe.

Come on, does this hypothesis pass muster? Isn’t there a recession on still – unofficially but have you taken a look at the purchasing power of the middle class lately?

Production to scale is a great idea when demand is always pointing upwards on a growth chart but it’s a sorry idea if your demand falls off a cliff or in this case becomes as volatile as fickle fig leaf.

Further,

Gartner says that "After billions of dollars spent on ERP, many companies still lack the timely, accurate and network-based data that can guide fact-based, timely supply chain decisions." It also notes that companies are collecting in one way or another vast amounts of information, much if not most of which is not being used effectively for improved decision making. "Big data" is the term associated with the opportunity to better mine this information and extract more value out of it, to the great delight of data warehouse. analytics, and storage vendors.

Now, remember what I said just a few posts back about the inevitable entrance of Big Data into the enterprise world – this is no big secret and my advice to you is to get on the bandwagon now. That’s also the reason why I started my Big Data blog because there’s no escaping this elephant in the room.

This provides a perfect segue into a curious coincidence wherein this firm came into my crosshairs – Lokad. Now, I’m not very familiar with the technology but that will be the focus of my next blog post as I investigate what they do. The gist of it is that they’re trying to get better forecasts by digging through Big Data.

There is no article about China which doesn’t recount some of the following snippets:

When one reads about these working conditions — 12-16 hour shifts, pay of ~$1 per hour or less, dormitories with 15 beds in 12×12 rooms

For Mr. Cook, the focus on Asia “came down to two things,” said one former high-ranking Apple executive. Factories in Asia “can scale up and down faster” and “Asian supply chains have surpassed what’s in the U.S.”

“The entire supply chain is in China now,” said another former high-ranking Apple executive. “You need a thousand rubber gaskets? That’s the factory next door. You need a million screws? That factory is a block away. You need that screw made a little bit different? It will take three hours.”

“The entire supply chain is in China now,” said another former high-ranking Apple executive. “You need a thousand rubber gaskets? That’s the factory next door. You need a million screws? That factory is a block away. You need that screw made a little bit different? It will take three hours.”

That’s because nothing like Foxconn City exists in the United States.

The facility has 230,000 employees, many working six days a week, often spending up to 12 hours a day at the plant. Over a quarter of Foxconn’s work force lives in company barracks and many workers earn less than $17 a day.

And lastly,

The answers, almost every time, were found outside the United States. Though components differ between versions, all iPhones contain hundreds of parts, an estimated 90 percent of which are manufactured abroad. Advanced semiconductors have come from Germany and Taiwan, memory from Korea and Japan, display panels and circuitry from Korea and Taiwan, chipsets from Europe and rare metals from Africa and Asia. And all of it is put together in China.

Summarizing, Chinese firms can scale up and down rapidly i.e. they have flexibility that the Chinese government and populace are willing to allow. Something that cannot be obtained stateside in whatever shape or form. The key takeaway is that it is not only scale but the willingness and ability to go either way with it. In the US, one finds that scale is directed one way towards growth but scaling down is an arduous, acrimonious and drawn out affair if it ever happens.

So here’s the first key to Smarter Manufacturing – Flexibility and Scalability.

In an earlier post, I blogged about the Baltic Dry Index as a good indicator of economic activity (Read it here: Ready for a recession?)

Even if we were to magically start moving in the Baltic Dry Index in a positive direction which would be a tremendous relief for everyone (but remember – *magically*), the US treasury and the Federal Reserve would continue to devalue the US dollar for two practical reasons:

1) Repay outstanding debts with a depreciated currency. This is really quid pro quo with some of the trading partners of the US against whom the US has been running trade deficits for the better part of a decade. The whole point of trade is not for one side of the equation to accumulate a lot of paper currency but to reciprocate in buying the origin country’s exports.

2) Make US exports competitive with other countries and reignite production/manufacturing stateside.

In fact, if the US (and World) economy were to recover some what, the above two agencies would devalue the US dollar with a vengeance.

This sort of policy, if successful, would mean a repatriation of some of the manufacturing that went overseas. Going further, when US firms look at the scenario (albeit a few years down the line) and see that the assets created overseas for manufacturing whatever widgets were outsourced have depreciated or is in need of upgrades to remain viable, that would be the decision point for deciding where the next generation of manufacturing will be located.

Much of the trajectory of what we see taking place goes to answering that question of the future and the above two agencies are hell bent on creating conditions that answer this question of manufacturing in the positive.

Or so I believe.

In such a scenario, what I believe to be key to long term competitive manufacturing is the ability to be smart about manufacturing – it means being able to operate using a very thin buffer for error because American firms will be competing with overseas firms (firm benefiting from their own countries’ competitive devaluation) that will continue to compete on large volumes and scale.

About me

I am Chris Jacob Abraham and I live, work and blog from Newburgh, New York. I work for IBM as a Senior consultant in the Fab PowerOps group that works around the issue of detailed Fab (semiconductor fab) level scheduling on a continual basis. My erstwhile company ILOG was recently acquired by IBM and I've joined the Industry Solutions Group there.